Unleashing Animal Spirits - Self-Control and Overpricing in Experimental Asset Markets

62 Pages Posted: 18 Apr 2016

See all articles by Martin G. Kocher

Martin G. Kocher

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; Institute for Advanced Studies (IHS) - Department of Economics & Finance; Göteborg University - School of Business, Economics and Law; Queensland University of Technology - School of Economics and Finance

Konstantin E. Lucks

Ludwig Maximilian University of Munich (LMU)

David Schindler

Tilburg University

Date Written: March 17, 2016

Abstract

One possible determinant of overpricing on asset markets is a lack of self-control abilities of traders. Self-control is the individual capacity to override or inhibit undesired behavioral tendencies such as impulses and to refrain from acting on them. We implement the first experiment that is able to address a potential causal relationship between self-control abilities and systematic overpricing on financial markets by introducing an exogenous variation of self-control abilities. Our experimental conditions seek to detect some of the channels through which individual self-control problems could transmit into irrational exuberance on the aggregate level. We observe a strong effect of inhibited self-control abilities on market overpricing. Our findings are furthermore robust to reducing self-control abilities only for a moderate share of traders in a market. Low self-control traders engage in more speculative behavior early on, but because others imitate their trading patterns, they do not end up earning less and are not driven out of the market.

Keywords: behavioural finance, trader behaviour, self control, experimental asset markets, overpricing

JEL Classification: G020, G110, G120, D530, D840

Suggested Citation

Kocher, Martin G. and Lucks, Konstantin E. and Schindler, David, Unleashing Animal Spirits - Self-Control and Overpricing in Experimental Asset Markets (March 17, 2016). CESifo Working Paper Series No. 5812. Available at SSRN: https://ssrn.com/abstract=2766219

Martin G. Kocher (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

Institute for Advanced Studies (IHS) - Department of Economics & Finance ( email )

Stumpergasse 56
A-1060 Vienna, A-1060
Austria

Göteborg University - School of Business, Economics and Law ( email )

Vasagatan 1
Goteborg, 40530
Sweden

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Konstantin E. Lucks

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

David Schindler

Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
85
Abstract Views
671
rank
300,644
PlumX Metrics